Why Two Chinese Telecom Companies Have A Few Congressmen Completely Freaked Out

A technician examines a cell phone inside an anechoic room at Huawei's headquarters in Shenzhen.AP Images

Cisco Systems has ended a sales partnership with ZTE Corp. after an internal investigation into charges that the company sold Cisco networking gear to Iran, according to Reuters.

This comes at the same time as an 11-month investigation by the House Intelligence Committee that warned American companies to stop doing business with Chinese tech firms Huawei Technologies Ltd. and ZTE Corp..

Huawei immediately issued a statement saying the report "employs many rumors and speculations to prove non-existent accusations." And the Committee has been accused of being short of specifics in its report, including clear incidents of theft by either company.

But Huawei hasn't been able to get acquisitions in the U.S. for a while. In 2007, Huawei teamed up with Bain Capital to acquire 3Com Corp, a company which sold network security services to the Defense Department. That move was blocked by regulators. It was also forced to abandon its 2010 acquisition of 3Leaf Systems, according to the Wall Street Journal.

So why is everyone so concerned about Huawei and ZTE?

The biggest source of worry for the House Intelligence Committee has been the involvement of the Chinese government in both companies, and the national security risks that they could pose.

The concern is that the gear produced by both companies could contain malicious code that would allow the Chinese government access to data, and that even software updates pose a similar threat.

These risks were heightened when earlier this year ZTE Corp. admitted that one of its phones had a back door that could allow others with a "hardwired password" control of the device, according to Reuters.

Over $300 billion in U.S.trade secrets were stolenin 2011, according to U.S. Cyber Command, and the Committee's report attributes part of such cyber theft to China:

"Recent cyber-attacks often emanate from China, and even though precise attribution is a perennial challenge, the volume, scale, and sophistication often indicate state involvement.

As the U.S.-China Commission explained in its unclassified report on China’s capabilities to conduct cyber warfare and computer network exploitation (CNE), actors in China seeking sensitive economic and national security information through malicious cyber operations often face little chance of being detected by their targets."

The report alleges that Chinese telecom companies give the Chinese government the opportunity to "tamper with the United States telecommunications supply chain." The Committee also questioned the company's claims that its U.S. subsidiaries operated independently of the company's headquarters.